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05/27/2005 12:00 am EST
Jim Oberweisis the only advisor who had to take time away from his candidacy for governor to attend The Money Show in Las Vegas. Meanwhile, his microcap fund just received an award from Lipper as the top small- cap fund for the last three years. Here's his latest.
"We look for what we believe are the best companies and believe that the best 'companies' will eventually, on average, translate into the best 'stocks'. We define those companies with three objective criteria. Companies must be growing revenues at a rate of 30% or faster. Secondly, they must be growing profits at about the same rate. Thirdly, we always look for p/e multiples that are no greater than half of the company’s rate of growth. So if a company is growing at 30% a year, we will pay a p/e of up to 15 times earnings. If they are growing at 50% a year, we will pay a p/e up to 25 times earnings. These three criteria are absolutes.
"We then have five other criteria to select from those stocks. We look at a company’s product or service to make sure that it has the opportunity to provide growth going forward. We look at the price to sales ratio. We look at the balance sheet, to try and make sure there aren’t hidden surprises that may jump out at us. And ideally we look for an earnings acceleration— a situation where perhaps a company was growing at 30% last year and is growing at 40% this year and where the trend suggests that earnings will be accelerating towards 50% or 60% next year. The last thing we look at is the relative strength.
"The first three criteria are objective and are present in every stock we buy. We use those as filters to sort through the broad list of stocks, and that typically gives us a narrower list of 300 or 400 candidates, which then warrant additional research. The latter criteria are more subjective, and not all of the factors are necessary for each stock we consider. From these, we develop a model portfolio, which currently holds about 50 stocks. So far, this strategy has worked well. Our model portfolio, including transactions costs, has had a compound growth rate over 29 years of almost 24%. That’s more than double any of the major market averages over that period.
"Many things go in cycles, and those can last for a generation. Most of the people who are now looking at stocks don’t really remember what happened in the 1960s or perhaps the 1970s. In that period, we had extreme rates of inflation, extraordinarily high interest rates, and a very challenging stock market. My suspicion is that we are entering a similar period. The strongest statement I could possibly make is that interest rates will continue to move up and go much higher than they are today and much higher than most suspect. And I think that inflation along with that will go up. This will be challenging for the market. But like the period in the 1970s, we will likely see small-cap growth stocks significantly outperform, and we’ll see gold stock significantly outperform. I suspect we will see the price of gold to double over the next three years or so.
"Meanwhile, we expect to see strong international markets. One company we like is Central European Distributors (CEDC NASDAQ), which is the leading distributor of vodka and other beverages in the Polish market. The Polish economy has probably been the strongest of the 'new' European markets. This is a very interesting company trading at a very low p/e and with a very solid record of growth. Strangely enough, the company is headquartered in Florida, but most of its business operations are in Europe. I also expect significant opportunities in China. I don’t mean that everything is perfect there by any stretch of the imagination. But the chance for companies to grow revenues at 30%-50% are probably better in China than anywhere else. Ctrip.com (CTRP NASDAQ) fits in with this scenario. It is a travel booking company, primarily for business and leisure travel in China. It has relationships with 1,700 hotels in China and 450 hotels abroad. They have relationships with virtually every airline that originates any flights in China, so they have an excellent position in a market that will likely continue to grow very substantially over the near future.
"One domestic company we like in the technology sector is Cogent (COGT NASDAQ), which does automated fingerprint ID. Their biometric fingerprint solutions will literally digitize and once digitized can match fingerprints in seconds. With increased security demands and needs, this is something that will continue to show very rapid growth over the next few years. Orckit Communications (ORCT NASDAQ) designs and markets digital subscriber line systems. Its customers include Deutsche Telecom and France Telecom. This is a company that just turned profitable; in March, it reported its first profitable quarter in several years. We think the future is very, very strong. Revenues in the first quarter were $21 million, up from $8 million in the previous quarter, and up from less than $1 million in the same quarter a year ago."
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